Volatility expected for Chinese yuan, as experts diverge on 2019 outlooks

Traders and fund managers are predicting a year of volatility for the yuan, despite its strong start to 2019.

A sharp appreciation in the currency already appeared to be rapidly losing steam on Monday. It was changing hands at 6.7892 against the US dollar, down 0.17 per cent. Last week, the yuan posted its first weekly decline in five weeks, leaving it up 1.5 per cent so far this year.

The uptick was on the back of a weakened US dollar, optimism over a permanent trade war truce with the United States and the hope that the Chinese authorities would intervene to support the yuan.

However, analysts are now questioning whether Beijing will continue to prop up the yuan, given the country’s narrowing current account surplus and the slowing domestic economy, both of which are likely to weaken the currency.

Imports are outstripping exports, leading to a decline in China’s current account. This may lead China to accelerate the opening up of domestic capital markets to foreign investment, as it looks to redress its balance of payments (BOP).

This could lead to increased volatility, experts said.

“The driving forces for a weaker yuan include a slowing domestic economy, a narrowing current account surplus, and the authorities’ tolerance for greater foreign exchange flexibility,” said Haibin Zhu, JP Morgan’s China chief economist.